Economic Perspective The North Douglas C. Nobel lecture
The present political social and economic set up is the result of various decisions made in the past. Different political social and economic ideologies in the past have been modified to provide a better life to the world. If not so these ideologies have offered a lesson to learn from. The society at large has legal and cultural set ups that direct it. The civilization process has led to increase in cooperation among various economic agents. This has promoted the establishment of economic institutions that will allow smooth interaction of various economic agents.
The presence of informal and formal practices in any society has a great influence on economic activities. Formal practices are rules and regulation that govern various activities. Informal practices include culture, beliefs, norms and behaviors. Economic institutions are established laws, customs or practices that that govern various economic activities. Various economists have played a great part in this topic of economic institutions. One of these economists is Nobel Prize winner Douglas North in his Nobel lecture
The summary to Nobel lecture delivered by North Douglas C.
According North (1993), the lecture scrutinize what others have done concerning nature of institutions and how they affect economic performance, description of cognitive approach to human learning implications of this approach for improving ones understanding of the past and its implications for current development policies. North employs the idea of Coase theory. This theory postulate that, for a perfectly competitive market to exist the properties rights should be well defined and the bargaining costs should be zero. On the other hand, efficient markets may be created if the competition is strong enough to approximate Coase zero transaction costs and when gain from trade as stated in neoclassical theory can be realized by the parties. Where the significant transaction cost exists, consequential market institutions will be designed to induce the actors to acquire information essential in correcting their models. Economic agents are also assumed to be rational and they have perfect information. However, North argues that such a situation will never exist and in long run the polity will have a great influence in the economy.
North postulates that institutional evolution of the economy is shaped by the institutions and organizations. Economic changes are as a result of day to day decision made by the individual actors and entrepreneurs of organization. Institutional changes are incremental and continuous. Economic agents get involved in altering of existing contracts as well as modifying various behaviors and even doing away with some of them.
North analytical framework was modification of the neoclassical theory. He retains the scarcity assumption while adding the dimension of time. Time in Norths work refers to period taken in human learning which dictate the decision made.
He modifies the assumption of rationality and asserts that economic agents will never have full information and hence their rationality will be limited. North postulates that the neo-classical efficient market will exist if the transaction cost is zero. Regardless of the institutional arrangements aggregate income can be maximize if bargaining is costless. Institutions serve the interest of actors with bargaining power to form rules. To North bargaining power does not affect efficiency of outcomes in the world of costless transaction. The case is opposite in the world of positive transaction costs. On the other hand, competition plays a big role in reduction of enforcement costs. North asserts that past and present markets have been characterized by imperfections and high transaction costs. Therefore it may remain that efficient markets are so exceptional since it is the polity that defines and enforces property rights. Value in economic market will include the physical attributes and the property rights value.
Since institutions are part and parcel of organizations, their existence reflects opportunities provided by the institutional matrix. An organization is formed by a group of indivuals with common objectives or purpose. These organizations may include economic bodies (trade unions, firms, and cooperatives), political bodies (the senate, political parties, and regulatory bodies), social bodies (clubs, church) and education bodies (vocational training centers, schools and universities)
North assert that intensity of competition will dictate the rate of learning. Competition which is scarcity impeded will induce the organizations to engage in learning so as to survive. Incentive to learn in a monopolistic market is low as compared to a competitive market. Learning is factor that influences economic change but the expected pay offs to acquiring knowledge determines the direction of the change.
To the issue of rationality, North postulate that in highly developed modern economies it may be true that individuals can act accordingly on the knowledge of their self interest. However this is impossible under condition of uncertainty which has been a characteristic of various markets.
Institutions transform beliefs into economic and societal structures which include informal norms of behavior and formal rules. Individuals usually have cognitive systems to interpret the environment. The internal representation of this is the mental models. The institutions will then represent the external mechanism which individuals create to structure and order the environment. On the issue of time, North asserts that time entails both the current experiences and learning as well as past generation cumulative experience that has been embodied in the culture.
The resultant punishment and monetary rewards have been the incentives to acquire pure knowledge which is essential for modern economic growth. The belief systems have also a key role to play. North postulate that, economic development in Western Europe has been a result of gradually evolving belief system in the competition context among divided political or economic units which resulted into institutions and political structure which have given birth to the modern economic growth.
Economic performance is shaped by the admixture of informal norms, formal rules and the enforcement characteristics. North recommends that policies toward development should include the creation of polities that will create and enforce efficient property rights. The copying of formal rules of another economy may not result into desired results due to differences in informal norms and enforcement. Transfer of rules from successful Western Europe to underdeveloped countries will then not be an assurance to good economic performance. A great research on how to model developing countries polities then need to be undertaken.
In his conclusion North urges that beliefs systems and institutions must change for success reform considering that it is the mental models of the actors that will shape choices. He also recommends the development of norms of behavior in an effort to support and legitimize rules cloistered by powerful reinforcing mechanism polities. To add on these North asserts that, despite some degree of enforcement adverse political rule, informal institutions favorable to growth can result to economic growth. To North, flexible institutional structures able to survive shocks and changes which are part and parcel of successive evolution have evolved from successful politicaleconomic systems.
Relating Norths noble lecture to our understanding of economic institutions
In our contemporary world the economic institutions include both locally and international formulation. Economic actors interactions cannot run smoothly without these institutions. Local economic institutions are perceived by some economic agents as a bother especially where many process are required before a certain transaction can be executed. On the other hand to some, this is a golden opportunity to ensure their property ownership is well protected and those transactions are legally protected. Economic institutions are also perceived as government controls. However as stated by North they result from past experiences and only represent our mind interpretation of the environment, therefore they should be welcomed
Gaps in Norths work
His work doesnt discuss the formulation, importance and working of international economic and political institutions. His work has concentrated so much on national and regional scope.
Importance of norths work and why deserve a prize
Norths work is very important. First, North framework of analysis assume scarcity which is a real situation facing almost if not all economic actors. He also factor in time dimension as regard to the cognitive learning approach of the economic actors. He also postulates that rationality assumption of the neoclassical theory in real situations does not exist especially in less developed countries where market information is very limited. North also postulate that that success of any economy must be guided by admixture of polity and good informal and formal institutions if economic growth is to be achieved. His statement that adoption of institutions of one economy by another economy may not be the best policy should be rewarded. All these make a great contribution to the world of economics and deserve a Nobel Prize.
Others say on the issue discussed by North
Victor e tal (1989) postulate that lesson from past have guided some countries shaping their institutions. China has learnt from Hungary 1959 outcome of ant rightist campaign against intellectuals and associated disaster of the Great Leap Forward. On this note, China has welcomed institutions that will offer more freedom to economic actors and ensure economic growth.
Hunt (2003) postulates that, the evolution of institutions and ideology result from the struggle between interpreting and changing the world. Society would always have a quest for change and interpret every phenomenon. During this process the institutions and ideologies are usually born. William (2003) argues that the international institution offers a framework for businesses transactions as well as solving differences in contracts. They also supply public goods. In addition to this, he postulates that it the human actions that create institutions which are designed to better serve the interests of global community. Well devised institutions will ensure environment for sustainable growth and enhancement of welfare.
International institutions have enhanced economic cooperation, trade and economic development and promotion of stability in exchange among players (Akintan 1977). Carlo (1994) is another author who has written about this issue. He postulates that, the formulation of economic institutions should be a product of all economic agents. Political authorities, trade unions, churches, scientific and private households should all have a say. Karl (2003) have discussed about property rights. The property rights reduces risks since they delimit individuals and organization action vis a vis other rights owner. It is a leeway and freedom to the owner as far as what to do with the object is concerned. Practical existence of economic intercourse and organization would not have been possible in absence of property rights
Conclusion
The issue of economic institutions is indispensable to any economy whose objective is to ensure economic growth. All actors in the economy should have a voice in the formulation of economic institutions. The presence of polity in an economy accompanied by good economic institutions will usually lead to economic growth and consequently economic development.